Economy of Cyprus - Economy in The Turkish-occupied Area

Economy in The Turkish-occupied Area

The economy of Turkish-occupied Northern Cyprus is about one-fifth the size of the economy of the government-controlled area, while GDP per capita is around one-third. Because the de facto administration is recognized only by Turkey, it has had much difficulty arranging foreign financing, and foreign firms have hesitated to invest there. The economy mainly revolves around the agricultural sector and government service, which together employ about half of the work force. The tourism sector also contributes substantially into the economy. Moreover, the small economy has seen some downfalls because the Turkish lira is legal tender. To compensate for the economy's weakness, Turkey has been known to provide significant financial aid. In both parts of the island, water shortage is a growing problem, and several desalination plants are planned.

The economic disparity between the two communities is pronounced. Although the economy operates on a free-market basis, the lack of private and government investment, shortages of skilled labor and experienced managers, and inflation and the devaluation of the Turkish lira continue to plague the economy.

Turkey is by far the main trading partner of the Turkish-occupied area, supplying 55% of imports and absorbing 48% of exports. In a landmark case, the European Court of Justice (ECJ) ruled on 5 July 1994 against the British practice of importing produce from northern Cyprus based on certificates of origin and phytosanitary certificates granted by the de facto authorities. The ECJ decided that only goods bearing certificates of origin from the internationally recognized Republic of Cyprus could be imported by EU member states. The decision resulted in a considerable decrease of Turkish Cypriot exports to the EU: from $36.4 million (or 66.7% of total Turkish Cypriot exports) in 1993 to $24.7 million in 1996 (or 35% of total exports) in 1996. Even so, the EU continues to be the second-largest trading partner of northern Cyprus, with a 24.7% share of total imports and 35% share of total exports.

The most important exports of Northern Cyprus are citrus and dairy products. These are followed by rakı, scrap and clothing.

Assistance from Turkey is the mainstay of the Turkish Cypriot economy. Under the latest economic protocol (signed 3 January 1997), Turkey has undertaken to provide loans totalling $250 million for the purpose of implementing projects included in the protocol related to public finance, tourism, banking, and privatization. Fluctuation in the Turkish lira, which suffered from hyperinflation every year until its replacement by the Turkish new lira in 2005, exerted downward pressure on the Turkish Cypriot standard of living for many years.

The de facto authorities have instituted a free market in foreign exchange and permit residents to hold foreign-currency denominated bank accounts. This encourages transfers from Turkish Cypriots living abroad.